California Cities File for Bankruptcy, Although It’s Different from a Personal Bankruptcy

Desert Hot Springs, a small resort town of about 26,000 people in Riverside County, California, is reportedly considering filing for bankruptcy protection. Two other California cities, Stockton and San Bernardino, have filed for bankruptcy since 2012. The most well-known current municipal bankruptcy is that of Detroit, Michigan, the largest American city to seek protection under Chapter 9 of the U.S. Bankruptcy Code. A municipal bankruptcy shares some similarities with Chapter 13 personal bankruptcy cases, but it is more like a corporate bankruptcy filed under Chapter 11. Both types involve a reorganization of debt payments, but some debts that are nondischargeable for an individual might be more flexible for a city government. A key issue emerging in many current municipal bankruptcies involves payments owed to pension funds, which could affect thousands of individuals and play a role in personal bankruptcy filings.

The state of California is reportedly doing well, with an estimated $2.4 billion budget surplus for the upcoming fiscal year. Some California cities are not doing as well. A new finance director in Desert Hot Springs found that the city’s $13.5 million budget is short by $3 million. She placed the blame on “higher-than-expected pension and salary costs.” The city is also still paying bond debt incurred to get out of a 2001 Chapter 9 bankruptcy filing. Nearly seventy percent of the city’s budget, Reuters reported, went toward salaries and payments to the California Public Employees’ Retirement System (Calpers). Pension payments to Calpers have been a prominent issue in California’s other two recent municipal bankruptcies.

Pension plans are generally part of an agreement a city makes with its employees, similar to retirement plans for employees of private businesses. The closest analogy in a personal bankruptcy, in terms of legally-required payments and aside from any other duty to support children and other dependents, might be child support, spousal maintenance, or alimony. Bankruptcy law expressly prohibits the discharge of domestic support obligations, 11 U.S.C. § 523(a)(5), but both governments and corporations have considerable leeway to modify their obligations to their employees, including payments to pension funds. A California federal district court, for example, gave the City of Vallejo the ability to reject collective bargaining agreements with its own employees in a Chapter 9 case. In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009), affirmed432 B.R. 262 (E.D. Cal. 2010).

The bankruptcy system can offer relief to people who do not have enough income available to make their required debt payments. A debtor may be able to pay down debts by liquidating assets, restructure bill payments into a more manageable schedule, and possibly discharge some of their remaining debts. Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies for more than sixteen years. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-9399.